The changing face of the media and entertainment industry

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

01 Feb 2018

Growing demand for streaming services means media and entertainment companies are exploring new ways to expand the reach of their content. We look at whether this changing landscape may create opportunities for investors.

What you’ll learn:

What impact the digital revolution has had on the media and entertainment industry.

How newspapers are increasingly focusing on online content.

How investors can gain exposure to the media and entertainment industry.

The digital revolution has had a dramatic impact on the media and entertainment industry in recent years, giving consumers access to a huge range of content and information whenever they want it.

Go back just a few decades to the early 1980s, and watching television, for example, didn’t involve much decision-making, with just four channels to choose from. Similarly, if you wanted to catch up on the news, you’d either buy a newspaper, watch a news programme on television, or listen to the radio.

Now, however, increasing numbers of households use streaming services such as Netflix and Amazon Prime to access the content they want anytime and anywhere, and read the news online, either on phones, laptops or tablet, rather than buying a newspaper. According to Bloomberg Intelligence, 2017 is likely to be the worst year for conventional pay-TV subscriber losses in history, surpassing the 1.7m customers lost in 2016.1

Here, we look at what opportunities the changing media and entertainment industry may create for investors, and some of the risks involved.

Outlook for the media and entertainment sector

The UK’s entertainment and media sector is forecast to be worth £72 billion by 2021, according to accountancy firm PwC’s Global Entertainment and Media Outlook 2017-2021 report, up from £62 billion in 2016. The biggest contributor to growth will be advertising, accounting for a third of total revenue by 2021, the report says, whilst the virtual reality sector will grow at a faster rate than any other entertainment and media industry. Consumer spending on Netflix and other internet on-demand video revenue is set to overtake spending on cinema admissions by 2021.2

Companies worldwide are busy increasing their investment in online streaming platforms to keep up with today’s ‘on-demand’ world.

Walt Disney Co, for example, last December agreed to buy the majority of 21st Century Fox’s business for $52.4bn to help it compete with the technology companies which are tempting audiences away from traditional TV networks.3

Among the biggest companies that form part of this trend is Netflix, which was one of the first companies to market a streaming service in 2007. The company was originally founded in 1997 to offer online film rentals, and then debuted a subscription service in 1999 offering unlimited DVD rentals in return for a monthly payment. Its streaming service is now available worldwide and has 109m members in over 190 countries.4

Netflix is listed on the US technology-focused NASDAQ Index, and has shown impressive growth for investors since its initial public offering (IPO) in 2002, although past performance should never be used as an indicator of future performance. The service added 5.3m subscribers in the three months to September last year, a 49% increase compared to the same period the previous year. The company expects to spend between $7bn and $8bn on content next year in a bid to stay ahead of the competition.5 Shows due to air this year include Maniac, starring Emma Stone, and the Coen Brother’s Ballad of Buster Scruggs.

Amazon, meanwhile, is investing heavily in Prime Video, with analysts estimating a budget of around $4.5bn for its Prime Video service.6 Amazon in December partnered with Apple Inc, so that the Amazon Prime Video app could be brought to Apple TV in more than 100 countries worldwide.7 However, its media and entertainment business is only a small part of Amazon, which is predominantly an e-commerce and cloud computing company, and so it cannot be considered a pure entertainment company in the same way Netflix is.

Netflix and Amazon are amongst the so-called ‘FANG’ stocks - Facebook, Amazon, Netflix and Google – which all reached new highs at the start of this year.8 Bear in mind, however, that past performance should not be relied on as a guide to future performance, and there are no guarantees this winning streak will continue.

The growth of content streaming services has affected private broadcast companies, which have reported falling advertising revenues. ITV, for example, saw advertising sales fall by 4% in the third quarter of last year.9

The digital age is also impacting on newspapers and magazines, which are increasingly focusing on online content, to help counter the challenge of declining print advertising revenue. DMG Media, the consumer publishing division behind the Daily Mail, Mail on Sunday and Mailonline, warned in its 2017 annual report that a weakening of the UK economy, particularly if consumer led, could accelerate this decline.10

Ways to gain exposure to the media and entertainment sector

If you are thinking about accessing the media and entertainment businesses as an investor, remember this highly cyclical sector that is sensitive to the ups and downs of the business cycle, which may lead to volatility in share prices.

There are no funds which have particularly significant exposure to these industries, and buying individual shares in companies specialising in these areas is a high-risk strategy.

One option for investors looking for exposure to companies providing streaming services may be a specialist technology fund, where their money is spread across a wide range of firms, including companies such as Netflix and Amazon.

These funds may invest in many other types of technology company too, including, for example, those specialising in software, communications equipment, information technology, or robotics. Investing in a fund made up of a mix of technology companies rather than a few specific businesses won’t give you a return that reflects only these industries’ performance but will diversify or spread your risk.

Even if a number of the fund’s holdings fall in value, any losses will hopefully be offset with gains made elsewhere, although this is not guaranteed. Technology funds include the L&G Global Technology Index and AXA Framlington Global Technology fund.

These funds are only included as examples – they don’t constitute advice or a personal recommendation to invest in these or any other investment.

Remember that technology is very much a specialist area so if you are considering investing, you will need to think carefully whether you are willing to accept the risks involved, as you may get back less than you put in. If you’re unsure, seek independent advice.

Remember, the value of investments can fall as well as rise and you could get back less than you invest. Seek independent advice if you’re unsure of this investment’s suitability for you.

Learn about other investment options

There are thousands of other investment options you can choose from to build your portfolio. So, before deciding which investments you’d like to make, why not read our quick guides to shares, funds, ETFs (Exchange Traded Funds), investment trusts, cash and bonds, to see if they would be better suited to you.

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